Tackling Your Profit & Loss StatementNov 27, 2023
Most people that know me know that I like to get involved in the details and one area that I really like to dissect is a profit & loss (P&L) statement. In my opinion, this is where many people miss opportunities to “count the pennies” that add up to the real dollars. In addition, when you pick apart your P&L, you identify areas of the business that are underperforming so that you can develop strategies to improve them.
Managing a profit and loss statement involves monitoring and controlling various aspects of your operations. I like to go through a P&L line-by-line to see where the shortfalls appear. Are we spending too much on telephone? Do we really need to have trash picked up twice a week? Has my labor been mismanaged and now I am paying more in overtime? This is the level of detail that gets uncovered with this scrutiny.
Let’s break it down in greater detail:
Develop a Budget: In my opinion, it all starts here. By creating a budget and forecast to set financial goals and anticipate potential challenges, a department head or business owner can have benchmarks to measure against. Much like jumping in car and simply driving to an unknown location, a budget and forecast enable you to map out your expected results. Let this budget be your map. It is a good practice to regularly compare actual performance against these projections.
Revenues: Not only how MUCH revenue has been generated, but WHERE is the revenue coming from – what services, what products, etc. This helps you understand where to direct your marketing efforts or perhaps your operational training. Depending on your type of business, you may want to set up your P&L statement with your revenues bifurcated into different buckets to easily identify the revenue nuances.
Expense Management: Nothing is better than a thorough, line-by-line dissection of your expenses. I am an avid puzzle-solver and I love doing this as a game to find the opportunities. I remember once doing this for my client for the telephone expense line and I couldn’t understand why our telephone line expense was so high. I counted the phones we had in use, yet we were getting charged for one more line. Lo and behold, after further investigation, my client had been paying for an unused fax line in the wall (without a fax even connected to it) for over five years at $75/month. We cancelled that line and saved $900 annually from that point forward.
Profit Analysis: This should be a two-part process: a) looking at Gross Profit (GP) by subtracting the cost of goods sold (COGS) from your revenue; and b) calculating your net profit after deducting operating expenses, interest, and taxes. This profit analysis, combined with analyzing key financial ratios, such as gross margin, operating margin, and net profit margin, helps you assess your business's financial health and performance.
Develop a Routine: Review your profit and loss statement regularly - preferably monthly - to identify trends, address issues promptly, and make informed strategic decisions. When I was managing six (6) divisions for one of my clients, I would literally schedule time at the end of each month to review their P&L statements. I would then send any clarifying comments to the finance team to gain a better understanding (and to verify accuracy) of the P&L. Lastly, I would then cascade the month's results to the ENTIRE team so that they could better understand the levers of the business and how they could influence future statements.
In summary, it is your money, why would you want to give it away when perhaps, you don’t have to?
Want more ideas? For more information on Managing a P&L Statement, visit the Gray Cat Learning Series: https://www.graycatenterprises.com/p-and-l-analysis